New Mortgage Rules Attempt to Curb Housing Market Risk

The Rules for Getting a CMHC Backed Mortgage are Changing Yet Again.

The housing market un Canada is doing pretty well.  Although not all local markets are seeing the activity levels that are typically found in markets like Toronto and Vancouver overall house prices have been on a steady rise for quite some time now.  To help mitigate risk in the housing market, the government backs and regulates the Canadian Mortgage and Housing Corporation (CMHC), which provides insurance on mortgages in the case of a homeowner going into default.  This helps to prevent a massive devaluation in house prices like was seen in the US housing crisis.

To address potential new risks due how high home prices have risen in the housing market over the past decade with interest rates being so low CMHC has made several changes over the past few years.  In the past 24 months the  mortgage insurance premiums have been increased twice.  They've also increased downpayment requirements for both rental properties and houses over $1 million to 20% instead of the 5% required for houses not in those categories.  None of these changes seem to have cooled the market off.

Valentine's Day Gift?

The newest change being introduced by CMHC will affect any approvals granted after February 14, 2016 or any deals that close in July 2016 or later.  It attempts to balance the desire to help people to own their own home with the desire to protect existing homeowners from a potential rapid devaluation of housing if potentially rising interest rates make it difficult for people to keep paying their mortgages.  This protection would hopefully help those who base their retirement on their home.  The Finance Minister, Bill Morneau announced:

“The  Government’s role in housing is to set and maintain a framework that is equitable, stable and sustainable. The actions taken today prudently address emerging vulnerabilities in certain housing markets, while not overburdening other regions...  This measure will increase homeowner equity, which plays a key role in maintaining a stable and secure housing market and economy over the long term. It also protects all homeowners, including many middle class Canadians whose greatest investment is in their homes.”

When people have more skin in the game, they find ingenious ways to overcome adversity and they also benefit from lower mortgage payments.  The change that has been announced works in a graduated manner, so it only affects homes that are sold in between $500,000 and $1million.  While the 5% requirement will remain the same for houses up to $500,000, any house that costs more than this will have to pay an additional 5% downpayment for the amount of the purchase price that is between $500,000 and $1 million.  With the national average MLS house price under $500,000, this is a measure that is clearly targeted at some of the hotter marketplaces.

To see how this may affect your purchase take a look at the table below:

What do you think about this newest measure?  Leave your comments below.

Curbing Fake Bidding Wars in Ontario

In such a hot Seller's market, it seems that some Sellers' agents are encouraging Buyers to bid up the price of a property by pretending to have other offers on the property.  I haven't yet experienced the worst of the phantom offers yet, because in the case of multiple offers I always ensure to be physically present; in all bidding situations I've been involved in I have seen the other agents.  RECO plans to make it harder for agents to fabricate bids by requiring listing agents to keep copies of all offers received on file for at least a year.

In July, Ontario's regulator of real estate agents RECO (the Real Estate Council of Ontario) will be introducing new rules for how agents must handle multiple offer situations.  First, let me say that I like these rules - not that I think they're necessary, but they're a good business practice that any professional and ethical realtor should already be following.  I always keep all offers that I receive on a property because that's just a good business practice in case anything pops up later in relation to the transaction.

Some inexperinced realtors may have bought into the media hype of the super heated market and the horror stories of Buyers losing dozens of bids due to bidding wars.  In my opinion this would only happen in the case where an inexperienced agent doesn't know how to properly value a property.  If you know what a property is worth and only offer that much, plus a small premium to win the bid, the offer presentation isn't that difficult.  Otherwise the agent may have you overpay due to a lack of knowledge - or worse, just to get your deal done and collect a commission cheque.

In a hot market where mistakes can be made and easily exploited by someone who has more knowledge than you, it's best to have an experienced professional in your corner.  You may still lose some bids due to people with either deep pockets or poor representation out bidding you, but you will waste less time with counter offers and waiting around to see what happens.  You might even skip some properties that aren't worth your time.

The new rules won't really change much in my opinion, because the good agents are already following the mandated practices to some degree at least and unscrupulous agents who fabricate offers could still get a third party to tender offers that they have no intention of following through on.  However, I do think that the new rules are good to have, because it brings awareness to the situation and now people will have to go one step further if they really want to exploit the system unfairly - meaning that there's a better chance that unscrupulous agents will get caught.